Measure Market Health: Oscillators Heat Up

Author: Bob Lang Explosive OptionsFebruary 26, 2016

One of the best measures of market health is breadth, the advance/decline line. A tool I like to use that sizes up breadth is the McClellan Oscillator. I have written extensively on this tool in the past and reference it each day in my chat room and on social media. It is an important element in determining future direction.

We can point out areas where it appears the markets will reverse up or down. These extreme areas are evident on the chart (circles). It is rare to see extreme high levels (above 150) or extreme low levels (at -200 or lower) exist for too long. In fact, as we can see these are excellent points to put on a contrarian trade.

Even if it takes a few days, we can see these levels act like a coiled spring pulled back far and ready to snap. That happens regularly, and in a bear market such as this one the moves are severe and we have large opening gaps.

This recent move to the low 200's was exhaustive, and hence we saw sellers take control Tuesday. The oscillator reading showed the highest odds/probabilities favored a change in trend, after a sharp move higher off the lows a pullback was imminent.

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BobLang

Member Since 09.20.2012

Bob Lang is the founder and chief options strategist for Explosive Options. Bob uses his unique blend of charting, technical analysis and option trading to find the best ideas for his subscribers. He previously was a portfolio manager for a hedge fund and a very large pension and 401K system. He holds an M.B.A. from the University of Redlands and Bachelor's degree in Finance from San Diego State University.

Learn more about Bob's newsletter at www.explosiveoptions.net He is an in-demand educator and speaker on trading education, speaking to a wide variety of groups on a wide range of educational and trading topics, including technical analysis, options trade selection, and the psychology of trading effectively.